What's the worst that can happen? (And, how can we protect ourselves?)

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What's the worst that can happen? (And, how can we protect ourselves?)

Karen M.
Hales Corners, WI · Member since 2013 · 229 posts · 80 votes

This is a spin off of another thread where we discussed risk, risk avoidance, risk management, and getting over the fears of getting started.   

Question:  What's the worst that can happen to a real estate investor?  And, how do we protect / prevent each of the worst case scenarios? 

Brainstorm your "worsts" -- let's figure out our protections.  Thanks!   Back later to fill in. 

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Eric FernwoodBusiness Member
Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
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Hello @Karen M. ,

The following is what I go through with my investor clients concerning risk management.

First, there is no way to avoid risk, you can only manage it. Everything you do has risks. While you are reading this email you could be struck by a meteor. (Note: a person was actually struck by a meteor in Sylacauga, Alabama on November 30th, 1954. She was injured but recovered. However, in 1911 a dog was killed in Egypt by a meteor. So, people and dogs are struck by meteors, but not very often.) So, you need to keep "the worst that could happen" in perspective. A lot of bad things could happen but most are unlikely so you have to consider the cost benefit. For example, I live in Las Vegas, Nevada. While there are earthquakes, I am not aware of any damage ever caused by an earth quake. Could a major earth quake happen here today? Yes. Likely? No. So I do not see the cost-benefit of earthquake insurance in Las Vegas. My point is to be reasonable and always consider the cost-benefit ratio.

I divide investor risk into a few different categories:

[email protected]702-358-8884
FERNWOOD Team, KW VIP Realty520 Reviews
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  • Account Closed
    Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
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    Get killed any number of ways?..solution: be careful
    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
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    What's the worst as an investor? What kind of investor? Notes? Buy and hold? Flips? Vacation rentals? There are a lot of pitfalls for every category. As a buy and hold, I have had people skip out on the rent, sue me, tear up the unit, etc. At the time, each case seemed like the worst but I always managed to get past the problem and survive. I would say be proactive in your approach and keep problems to a minimum if possible.

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  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
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    Good point, I am talking buy and hold.   Also, I am thinking of *the worst*.   My worsts are things like --- job loss of primary income,  death of spouse who is the earner,  disability of spouse who is the earner,  property that becomes negative cash flow,  debts falling apart? (does that happen?)  

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  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
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    Remedies I am guessing:

    -- consider upping the life insurance

    --consider having / coverage of disability insurance

    -- rules of thumb for lending totals / reserves and loan paybacks.

    How about nasty partners?  Horrible contractors?  I don't know? 

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  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
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    I would like to know that if, by investing in rentals, I am ever putting my personal residence at risk.  Would a bad rental ruin my family's assets?  Or am I too scared? 

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
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    Overleveraging can be the fastest killer. Remember the crash. There were people that did survive. The majority of people that got crushed were leveraged to the max. For this reason, I personally leverage about 20%-25%. I am not as concerned with acquisitions and growing an empire as I am with knowing that if something changes drastically tomorrow that I will survive.

    2Reply
  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
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    Originally posted by @John Thedford:

    Overleveraging can be the fastest killer. Remember the crash. There were people that did survive. The majority of people that got crushed were leveraged to the max. For this reason, I personally leverage about 20%-25%. I am not as concerned with acquisitions and growing an empire as I am with knowing that if something changes drastically tomorrow that I will survive.

     It is a shame BiggerPockets won't let us vote more than once for a post, because I want to vote for this one 10 times.

    Agree completely.

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
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    Thanks Richard! I am in SW Florida and I saw it all unfold. I recall brokers saying "all you have to do is buy it"!  I almost felt the same way...but something inside me said there must be something wrong. There was:):):)

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  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
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    Honestly there are so much different things that can happen it is hard to describe. The things that I do to mitigate risks are

    • Hire a CPA- I can do my own taxes but it is better to have a professional do it to be "sure"
    • Hire a Lawyer - once we hit more than 2 houses in one area I had a lawyer look over our lease
    • Umbrella policy- make sure you have a huge liability policy to double chef
    • Be Open to Learning- things change all the time. The key is to be open and adapt. While you might not be burned the first time if you don't notice the "shot acrros the bow" you will lose the next time.
    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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    A lot of those worsts (death, disability, loss of job) aren't specific to RE investing, of course.  I would add to do thorough title searches and get title insurance! One worst would be to buy something from a non-owner, buy something headed to foreclosure, leveraged and liened to the hilt or involved in some blanket mortgage or something.   Also, never buy on a land contract or contract for deed.  It's not in your name until you pay it off.  There you could make payments for 10 years only to lose it because the seller gets sued and the judgement attaches to 'your' property.  Good discussion!

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  • Sheri Ulm
    Real Estate Investor · Norwalk, CA · Member since 2011 · 118 posts · 25 votes
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    @Steve Vaughan

    I disagree with your statement to never buy on a land contract. While your argument against it is very valid and completely true I believe there are exceptions. I just purchased a rental on land contract. However, I only paid $5k for the property with only $1k down and a few hundred in closing costs and the land contract is only 3 years. While it's true the sellers could get sued in this period of time and I could lose the property I only need to own it 4 months to cover what I have into it. After that I'm cash flowing a couple hundred a month after PITI and paying my PM. And that goes up + $100 month once the seller is paid off. And with no pre payment penalty I have the option to pay it off sooner thus further reducing my risk. Now granted some people won't even look at the area I buy in but I'll take a deal like this any day of the week.

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  • Andy WebbPro Member
    Rental Property Investor · Carrollton, TX · Member since 2013 · 750 posts · 538 votes
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    Originally posted by @John Thedford:

    Overleveraging can be the fastest killer. Remember the crash. There were people that did survive. The majority of people that got crushed were leveraged to the max. For this reason, I personally leverage about 20%-25%. I am not as concerned with acquisitions and growing an empire as I am with knowing that if something changes drastically tomorrow that I will survive.

     Hi John - I do not fully understand the statement "I personally leverage about 20-25%."

    Do you mean you buy 1 in 4 or 5 houses with debt and pay cash for the rest.  I am probably missing something.

    Also, general question: how do you measure "overleverage"?  

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
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    Originally posted by @Andy Webb:

     Hi John - I do not fully understand the statement "I personally leverage about 20-25%."

    Do you mean you buy 1 in 4 or 5 houses with debt and pay cash for the rest.  I am probably missing something.

    Also, general question: how do you measure "overleverage"?  

     Andy, I understood it to be -- maintaining 75% or better equity in a property, but I'm not 100% sure.  Let us know, John, thanks! 

    0Reply
  • Eric FernwoodBusiness Member
    Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
    11y

    Hello @Karen M. ,

    The following is what I go through with my investor clients concerning risk management.

    First, there is no way to avoid risk, you can only manage it. Everything you do has risks. While you are reading this email you could be struck by a meteor. (Note: a person was actually struck by a meteor in Sylacauga, Alabama on November 30th, 1954. She was injured but recovered. However, in 1911 a dog was killed in Egypt by a meteor. So, people and dogs are struck by meteors, but not very often.) So, you need to keep "the worst that could happen" in perspective. A lot of bad things could happen but most are unlikely so you have to consider the cost benefit. For example, I live in Las Vegas, Nevada. While there are earthquakes, I am not aware of any damage ever caused by an earth quake. Could a major earth quake happen here today? Yes. Likely? No. So I do not see the cost-benefit of earthquake insurance in Las Vegas. My point is to be reasonable and always consider the cost-benefit ratio.

    I divide investor risk into a few different categories:

    [email protected]702-358-8884
    FERNWOOD Team, KW VIP Realty520 Reviews
    WebsiteView Page
    4Reply
  • Micki M.
    Flipper/Rehabber · York, UK · Member since 2013 · 895 posts · 453 votes
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    wow @Eric Fernwood way to own that question! Thanks for your thoughtful outlining of RE risk potential in so many categories. Of course my favorite part was meteor statistics, I frequently use "I may get hit by a bus tomorrow" to support risk taking and will now change that to "hit by a meteor".

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
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    Originally posted by @Karen M.:
    Originally posted by @Andy Webb:

     Hi John - I do not fully understand the statement "I personally leverage about 20-25%."

    Do you mean you buy 1 in 4 or 5 houses with debt and pay cash for the rest.  I am probably missing something.

    Also, general question: how do you measure "overleverage"?  

     Andy, I understood it to be -- maintaining 75% or better equity in a property, but I'm not 100% sure.  Let us know, John, thanks! 

    I owe less than 20% of the value of my holdings. As far as being over leveraged..that is for each individual to determine in their own situation. Half of my properties can go vacant tomorrow and sit vacant and I will still have positive cash flow. That is peace of mind for me!

    1Reply
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